As we head into the second half of 2024, investors are keenly looking to currency movements for indications of how the forex market will shape up over the next few months.
In this context, JP Morgan issued its forecasts for the US dollar. The bank's analysis addresses various economic forces and geopolitical developments expected to affect the course of the dollar.
JP Morgan dollar forecast
The bank's medium-term view of the US dollar remains bullish based on higher yields, a growth cushion and other supportive factors.
However, the bank notes that “tactical concerns stem from emerging signs of fading US growth exceptionalism and saturated investor long positions.”
“Inflationary divergences will be key as central banks focus on inflation rather than growth,” JPMorgan wrote. “The implications of weak/flat US inflation readings are clear for the Fed's pricing direction, but are more subtle for the US dollar.” The bank states that the dollar index was more sensitive to inflation errors.
Factors affecting dollar prices
Analysts at JP Morgan highlighted the advantage of holding the dollar despite it being a defensive currency and its continued exceptionalism in the US as two factors driving the US dollar's upside.
However, while the first pillar of US dollar strength (the carry advantage) remains intact, the second pillar (persistent US exceptionalism) “appears to be in the early stages of losing its lustre,” they wrote.
The bank says it is concerned about these tactical risks, and recommended tactically reducing the length of the US dollar last week, although it still maintains long exposure to the US dollar via options.
Elsewhere, focusing on the current picture of the US economy, Chris Turner, global head of markets at ING and regional head of research for the UK and Central and Eastern Europe, told Investing.com that the share of the dollar in foreign exchange reserves has declined over the past 20 years, but It has remained stable over recent years, while in the private sector “the share of the dollar in global deposits and global liabilities has been remarkably stable at a level of 60% to 70% over recent decades.”
However, he says the US authorities cannot be complacent. “We also note that although the US current account deficit is highly manageable at 3% of GDP, it is largely financed by portfolio flows into longer-term debt securities,” Turner said.
He sees the medium-term risk for Treasuries and the dollar as being that in the absence of fiscal consolidation, “investors will need higher US yields and a cheaper dollar to find Treasuries attractive.”
Furthermore, the US elections are seen to have a major role in pricing the dollar over the next four to five years.
“The continued Democratic administration may be a slight negative impact on the dollar,” Turner says. “The Republican clean sweep for the dollar is a big positive on loose fiscal and tight monetary policy. The risk to the dollar is a Trump presidency without Congress, where he could look to a weaker dollar for stimulus – a policy that Robert Lighthizer, a member of Trump’s trade team, supports.
Dollar to Japanese Yen forecast
When it comes down to it, JPMorgan says it remains anchored on the Fed's interest rate path with upside risks from Japan behind the curve.
“Our USD/JPY forecast for YE24 remains at 153 as we perceive USD/JPY to remain anchored to the Fed’s policy rate path,” the bank wrote, explaining that their forecast is based on two Fed cuts. this year. However, they feel that if the US economy remains resilient and there are no interest rate cuts from the Fed, the USD/JPY could stabilize at 160.
“On the other hand, we are aware of the upside risks from the Japanese side given that domestic and speculative JPY selling pressures are unlikely to diminish as long as the Bank of Japan remains behind the curve, suggesting that Japan's real interest rate will likely remain in negative territory in the coming years.” “, says JPMorgan.
Dollar to British Pound forecast
As for the pound, JP Morgan says UK growth is improving but sterling seasonality, valuations, and positioning are leading to tactical selling. The bank also explains that sterling is a high-beta cyclical currency, so the manufacturing recovery is important.
“Monsoon pressures in May,” they argue. “Sterling has moved from a long cap to a modest sell, but this is less extended than other G10 peers.”
As a result, one of the bank's trading recommendations in its overall portfolio is to sell the pound sterling against the US dollar.